Philippines

The most common for-profit organizational forms utilized in the Philippines are the corporation, partnership, and sole proprietorship.

• A corporation is composed of juridical persons established under the Corporation Code and regulated by the Philippine Securities and Exchange Commission (“SEC”) with a personality separate and distinct from its stockholders. A corporation may be organized as either stock or non-stock. 
• A partnership similarly has a personality separate and distinct from its members. Partnerships may either be general partnerships (partners have unlimited liability for the debts and obligation of the partnership), or limited partnerships (one or more general partners have unlimited liability, while the limited partners have liability only up to the amount of their capital contributions).
• A sole proprietorship is owned and controlled by an individual who has full control of its business and owns all the assets, and consequently, is personally liable for all debts and obligations while he enjoys all the profits of the business. Sole proprietorships are registered with the Philippines’ Department of Trade and Industry. 

a. Enterprises that seek financing from investors and will have multiple owners tend to form corporations. Investments in such corporations tend to be through equity contributions.

b. Social Enterprises typically use non-stock corporations. A nonstock corporation is one where no part of its income is distributable as dividends to its members, trustees, or officers. Any profit which a nonstock corporation may obtain incidental to its operations, whenever necessary or proper, are used for the furtherance of the purpose of purposes for which the corporation was organized. Nonstock corporations may be formed or organized for charitable, religious, educational, professional, cultural, fraternal, literary, scientific, social, civic service, or similar purposes. like trade industry, agricultural and like chambers, or any combination.

In general, no requirement. The Boards may be permitted to consider other factors as part of the business judgment rule. It is not clear that shareholder pecuniary interests are always given primacy. Boards may also consider the interests of employees, customers, environment, sustainability, corporate governance, etc.

Non-stock Corporations: 

• Nonstock corporations may be formed or organized for charitable, religious, educational, professional, cultural, fraternal, literary, scientific, social, civic service, or similar purposes. like trade industry, agricultural and like chambers, or any combination.
• The right of the members of any class or classes to vote may be limited, broadened, or denied to the extent specified in the articles of incorporation or the bylaws. Unless so limited, broadened, or denied, each member, regardless of class, shall be entitled to one (1) vote.
• Membership in a nonstock corporation and all rights arising therefrom are personal and non-transferable, unless the articles of incorporation or the bylaws otherwise provide.
• No part of its income is distributable as dividends to its members, trustees, or officers. Any profit which a nonstock corporation may obtain incidental to its operations, whenever necessary or proper, is used for the furtherance of the purpose of purposes for which the corporation was organized.

Cooperative:

• Cooperatives primarily differ from corporations in that ownership is very inflexible and not based on the investment amount. Cooperatives are defined by seven basic principles: (i) membership is open and voluntary; (ii) control is democratic on a one-member-one-vote basis; (iii) members participate in the financial gains of the entity; (iv) they provide education and training to members; (v) they are autonomous; (vi) they cooperate with other cooperatives; and (vii) concern for community is central.
• The main benefit of this form is that it allows for the alignment of worker and investor interests and provides favorable tax treatment of member distributions. Additionally, since it is worker owned, controlled, and managed, the impact can be a primary consideration in decision making and operations.
• There are no such restrictions on the use of this form.
• No timing or cost differences.
• This form is well known and has been available for quite some time.

Social Enterprises are permitted to be formed and operated as non-profits. There is generally no difference in treatment among non-profit social enterprises or non-profits that are not social enterprises. There are no material benefits of, and/or restrictions on, using a non-profit social enterprise that does not apply to non-profits that are not social enterprises.

However, there are certain differences in terms of tax treatment:

• In terms of classification, accredited non-stock, non-profit corporations must be organized exclusively for one or more of the following purposes: religious, charitable, scientific, athletic, social welfare, or cultural purposes, or the rehabilitation of veterans. Accredited NGOs must be organized and operated exclusively for one or more of the following purposes: scientific, research, educational, character-building, youth and sports development, health, social welfare, cultural, or charitable purposes
• Exemption from income tax is extended to a broad range of organizational forms, including:
  • Non-stock corporations organized exclusively for religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans;
  • Civic leagues or organizations operated exclusively for the promotion of social welfare; and
  • Non-stock, non-profit educational institutions

Each of these entities is exempt from income tax on donations, grants, and gifts, provided that the organization's net income does not inure to the benefit of any private shareholder or individual and the business is not operated for the benefit of private interest, such as those of the founder or his/her relatives, or conducted with a trade or business purpose that is not related to the organization’s tax-exempt status. Profits generated from business activities are taxed, regardless of the disposition of the income.

Use of non-profits for social enterprises is very prevalent. Some non-stock corporations register as foundations. However, the initial contribution to start a foundation through registration with the SEC is PHP1,000,000.00 (approximately US$20,580.00)

Yes, see the discussion of the cooperatives above. 

There is generally no unique reporting requirement for social enterprises. However, foundations are required to submit sworn statements on their donations/contributions, as well as certificates of existence of programs/projects/activities annually to the SEC.

None. There is no specific legal designation for social enterprises in the Philippines as it is defined under this questionnaire. While there are cases that discuss or involve non-government organizations (“NGOs”), these pertain to entities that receive partial funding or subsidies from the government, rather than entities with specific social or environmental objectives.

Not generally. Only public companies need to comply with the SEC’s Sustainability Reporting Guidelines for Publicly Listed Companies (SEC Memorandum Circular No. 4, series of 2019). This Circular outlines information that covered companies will have to disclose in relation to their non-financial performance across the environmental, social, and governance aspects.

No.

No.

Philippine banks are obligated under Philippine law to reserve certain loanable funds to particular social causes. Under the Agri-Agra Reform Credit Act of 2009 or Republic Act No. 10000, all banks shall set aside 25% of their total loanable funds for agriculture and fisheries credit in general, of which at least 10% shall be made available for agrarian reform beneficiaries. As an alternative mode of compliance, however, banks, amongst other options, can buy government securities which proceeds shall be used for lending to the agriculture and agrarian reform sectors, open special deposit accounts with accredited rural financial institutions, provide rediscounting on eligible agriculture, fisheries and agrarian credits, and provide lending for construction and upgrading of infrastructure including farm-to-market roads. The Bangko Sentral ng Pilipinas (“BSP”), which regulates banks in the Philippines, imposes administrative sanctions and penalties of 0.5% of the total amount of its non-compliance and under-compliance. BSP regulations also provide that, for a period of ten years from June 17, 2008 to June 16, 2018, banks are required to set aside at least 8% for micro and small-sized and 2% for medium-sized enterprises, of their total loan portfolio based on their balance sheet as of the end of the previous quarter for lending to such enterprises.

Other investors are not required to look at ESG factors, but are permitted to consider them.

Social enterprises receive grants, charitable investments, and traditional investments, typically from private institutions and non-profit enterprises that aim to promote the development of social enterprises. The type of funding typically varies based on the enterprise form that the social enterprise chooses. For example, social enterprises formed as non-profits receive more grants and charitable investments, while social enterprises formed as for-profit corporations received more traditional investments.

Crowdfunding is a new but developing funding source for small businesses in the Philippines, including social enterprises. There are also developments as to instruments that may be issued by entities that would entail impact investments. For example, the Philippine Securities and Exchange Commission has issued a memorandum circular that covers the issuance of ASEAN Green Bonds. ASEAN Green Bonds follow the standards set by the International Markets Association’s Green Bonds Principles, and proceeds from Green Bonds must be exclusively used to finance or refinance, in whole or in part, new and/or existing eligible green projects that comply with ASEAN Green Bond Standards. Green Projects cover broad categories of eligible green projects, including clean transportation projects and renewable energy projects, among others. The Securities and Exchange Commission has likewise adopted the ASEAN Sustainability Bond Standards, which pertains to bonds, the proceeds of which would be applied exclusively to finance or refinance a combination of both Green and Social Projects that respectively offer environmental and social benefits. While both Green Bonds and Social Bonds are relatively new in the Philippines, with regulations having been issued only in 2018 and 2019, respectively, for both, certain Philippine companies have already issued bonds under these programs.

There is no special government funding specifically available to social enterprises as such. Depending on the enterprise form and industry, government grants, loans, bonds, and guarantees may be available. For example, the Philippine government, through the Department of Energy had a feed-in tariff program for renewable energy investors, designed to guarantee a fixed price for those willing to develop certain forms of renewable energy in the Philippines, such as solar energy and hydropower. It is generally difficult to obtain government funding – any government funding that is obtained often requires an application process as well. 

There are no companies that are formed as Social Enterprises that are listed in the Philippine Stock Exchange.

All publicly-listed companies must file sustainability reports on an annual basis in accordance with Memorandum Circular No. 4, Series of 2019, of the Philippine Securities and Exchange Commission.

Entities that have issued bonds that make use of the ASEAN Green Bonds label must issue, at minimum, annual reports to investors that show compliance with ASEAN Green Bonds standards and compliant use of proceeds. Other publicly traded Enterprises are not required to make disclosures on ESG related factors.

ASEAN Green Bonds and ASEAN Sustainability Bonds are not common, although recently more of these types of bonds are being issued. The latest ASEAN Sustainability Bond is the COVID-19 Action Response  (“CARE”) bonds of the Bank of the Philippine Islands, the proceeds of which would be used to finance and re-finance eligible micro-, small-, and medium-enterprises. As of 10 February 2020, at least 15 green and sustainability bonds issuances worth US$3.04 billion had already been issued by various issuers, according to data from the Securities and Exchange Commission.

In the Philippines, in order for non-stock, non-profit corporations to own land or engage in other nationalized activities (including operating a school, unless it is a school for the children of foreign diplomats; power generation; and use of natural resources, among others), at least 60% of its ownership must belong to Filipino citizens, or corporations at least 60% of the capital of which is, in turn, owned by Filipinos.

Crowdfunding is legal in the Philippines, allowing small businesses and Social Enterprise to solicit investment from the general public. The Philippine Securities and Exchange Commission has issued regulations for crowdfunding, classifying securities offered and sold as part of crowdfunding as exempt securities under the Philippine Securities Regulation Code, provided certain parameters are met, including that: (a) the issuer is an entity organized under the laws of the Philippines or a Filipino natural citizen, and accredited and/or accepted by a crowdfunding intermediary to utilize its platform; (b) the aggregate amount of securities that can be offered and sold by any issuer through crowdfunding within a 12-month period must comply with the maximum aggregate threshold of (i) PHP10,000,000.00 (approximately US$205,800.00), if the securities are offered or sold to any investor, or (ii) PHP50,000,000.00 (approximately US$1,029,000.00), if the securities are offered or sold to qualified investors (such as banks, registered investment houses, insurance companies, pension funds or retirement plans maintained by the Philippine government or its political subdivisions, and other qualified buyers under the Securities Regulation Code); (c) limits of sales made to any investors are followed (with the exemption of qualified investors; and (d) the offer is made through a qualified intermediary which is registered with the Securities and Exchange Commission. While the regulations make it clear that crowdfunding is a special case that does not require full compliance with the provisions of the Philippine Securities Regulation Code covering the offer and sale of securities, it still imposes certain restrictions intended to regulate crowdfunding.

The Philippine Tax Code exempts the following entities from income tax: (1) labor, agriculture or horticultural organizations not organized principally for profit; (2) mutual savings banks not having capital stock represented by shares, and cooperative banks without capital stock organized and operated for mutual purposes and without profit; (3) beneficiary society orders or associations, operating for the exclusive benefit of the members; (4) cemetery company, owned and operated exclusively for the benefit of its members; (5) non-stock corporations or associations operated exclusively for religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans; (6) business leagues, chambers of commerce, boards of trade not organized for profit; (7) civic leagues or those organized exclusively for the promotion of social welfare; (8) non-stock and nonprofit educational institutions; (9) government educational institutions; (10) farmers’ or other mutual typhoon or fire insurance companies, mutual ditch or irrigation companies, mutual or cooperative telephone companies, or like organizations of a purely local character; (11) and farmers’, fruit growers’ associations operated as a sales agent for the purpose of marketing the products of its members.

The above companies must satisfy two tests to qualify for income tax exemption: (1) the organizational test; and (2) the operational test.

• The organizational test requires that the corporation’s constitutive documents show that its primary purpose falls under the primary purpose of the above-listed entities. The operational test, on the other hand, requires that the regular activities of the corporation be exclusively devoted to the furtherance of such primary purpose.

Further, the earnings of a corporation that qualifies for income tax exemption that chiefly comes from donations, grants, or contributions should not inure to the benefit of its trustees, organizers, officers, members, or any specific person.

Furthermore, the income tax exemption granted is not absolute as it covers only the income received by corporations in furtherance of the purpose for which they were established; hence, income of whatever kind and character from any of their properties, real or personal, or from any of their activities conducted for profit regardless of the disposition is subject to tax.

No.

Corporations and individuals can deduct gifts, donations, and contributions to accredited non-stock, non-profit corporations up to 5% of taxable income for corporate donors and 10% for individual donors. “Income” refers to the donor’s income derived from a trade, business, or profession as computed without the benefit of this deduction. Donations to accredited non-government organizations, on the other hand, can be deducted in full, subject to some limitations.

In addition to income tax, donations and gifts to accredited non-profit organizations (and certain other entities) are also exempt from the donor’s tax, provided that (a) not more than 30% of the donations and gifts for the taxable year are used by the accredited NPO for administrative expenses; b) it does not pay dividends or compensation to trustees; and c) all income, whether fees, gifts, donations, subsidies, or other forms of philanthropy, are utilized towards the accomplishment and promotion of the purposes enumerated in the company’s incorporation papers.

Corporations and individuals who make contributions for the sole and exclusive purpose of combatting COVID-19 during the Philippines’ state of national emergency due to the pandemic may access special incentives, such as full deductibility of donations and exemption from the donor’s tax and value added tax (VAT) (BIR Revenue Regulation 9-2020).

No.

The Philippines has a magna carta for micro, small, and medium-sized enterprises or “MSMEs” under Republic Act 9501. MSMEs may qualify for government assistance.

MSMEs are defined as any business activity or enterprise engaged in industry, agribusiness and/or services, whether single proprietorship, cooperative, partnership or corporation whose total assets, inclusive of those arising from loans but exclusive of the land on which the particular business entity’s office, plant and equipment are situated, must have value falling under the following categories:

• Micro: not more than PHP3 million (approximately US$61,740.00)
• Small: PHP3.01 million to PHP15 million (approximately US$61,945.80 to US$308,700.00)
• Medium: PHP15.01 million to PHP100 million (approximately US$308,905.80 to US$2,058,000.00)

There are government grants and loan guarantees available for small businesses. In order to qualify for government assistance under the Magna Carta for MSMEs, they must be:

1. duly registered with the appropriate agencies as presently provided by law. In the case of micro enterprises as defined under the Magna Carta, registration with the office of the municipal or city treasurer shall be deemed sufficient compliance with this requirement;
2. one hundred percent (100%) owned, capitalized by Filipino citizens, whether single proprietorship or partnership. If the enterprise is a juridical entity, at least sixty percent (60%) of its capital or outstanding stocks must be owned by Filipino citizens;
3. a business activity within the major sectors of the economy, namely: industry, trade, services, including the practice of one’s profession, the operation of tourism-related establishments, and agri-business, which refers to any business activity involving the manufacturing, processing, and/or production of agricultural produce; and
4. it must not be a branch, subsidiary or division of a large scale enterprise.

No.

No.

No.

The SEC on average takes 4-6 weeks to process an incorporation application. Generally, the filing fees amount to 1/5 of 1% of the paid-up capital or PHP1,000.00 (approximately US$20.56) for non-stock corporations.

In general, all enterprises, including social enterprises, need to register with the Philippine Bureau of Internal Revenue (“BIR”) and secure a ruling or certification from the BIR in order to confirm applicable tax exemptions (for non-stock, non-profit enterprises).

Yes, startups can generally easily form and flourish in the Philippines. However, incorporation applications and regulatory compliances would be similar to regular corporations.

Yes, social enterprises can generally easily form and flourish in the Philippines. However, incorporation applications and regulatory compliances would be similar to regular corporations.

None.

Government corruption is generally an issue in the Philippines. Previously, Philippine senators were caught funneling funds allotted to them into dummy non-profit organizations which turned out to be pass-through entities used by the said Philippine senators to hide stolen government funds. In another recent incident, officials of the Philippine Health Insurance Corporation (the government-owned and -controlled corporation tasked with managing the country’s health insurance program) had allegedly taken PHP15 billion (approximately US$308,342,100.00) worth of funds from the state insurance company and pocketed the funds.

Legislators can consider potentially incentivizing for-profit social enterprises, so long as the term “social enterprises” is defined by law to prevent abuse of the classification. Partial relief from income taxes, for example, could be considered for certain forms of for-profit social enterprises.

Incentivizing social and environmental responsibility through tax incentives, grants, and other similar initiatives would increase the social and environmental responsibility of Enterprises in general.

None.